Sole Trader to Company Transfer - Valuation

Didn't find your answer?

I am currently a simple sole trader which I need to transfer to a limited company. I have done some research and have called a few accountants but there seems to be a difference of opinion.

My understanding is there needs to be a valuation of the business typically based on assets and profit. You would use this value to effectively "sell" the business to the company using a directors loan account in credit. Then pay capitol gains if necessary. Then personally withdraw from the DLA as required with no further personal tax. 

Is this correct? I asked the accountants about valuation and they don't seem to know what I am on about?

many thanks

Replies (10)

Please login or register to join the discussion.

paddle steamer
By DJKL
03rd Jul 2018 13:08

Does "the business" have any value is the starting point and does it have any chargeable assets (except possible goodwill)? What about the other assets and their tax wdv?

When considering "the business" profits for your starting position you need to consider what the cost would be to "the business" if the owner was paid appropriate wages for the work he does for the business both re operations and management, what sort of level of profits would it actually make if needing to pay third parties at arms length to perform these functions. (For a lot of smaller business entities the answer is often nil)

If it looks like level of profits as adjusted are negligible then professional valuation likely not worth bothering with, if decent profits after notional salary of owner/manager then consulting an accountant re valuation and tax issues may be advisable ( And likely affordable given level of profits)

My very crude rough rule of thumb is that if a business cannot churn in at least circa £30-£35k profits there possibly is no goodwill as to me that is the minimum someone would likely need to pay a third party, working full time, to operate and run all facets of the business currently done by the current owner.

Thanks (0)
By Tim Vane
03rd Jul 2018 13:13

Find some better accountants. You will need advice around valuation, goodwill, assets, amortisation and many other tax issues.

There are a number of possible valuation methods. For instance, take 6 weeks holiday from your sole trade and pay somebody to run it for you during that time to generate the same revenue as you would if you were not on holiday. Ensure that you pay a good enough salary to get somebody able to do the same job as you do to the same standard. After that 6 weeks you will have 6 weeks of income and 6 weeks of salary to deduct from that income. Whatever is left over is the profit (or potentially loss) generated by 6 weeks of trading. Extrapolate that value to an annual value and then multiply by a sensible factor (e.g. 1.2 or 1.5). If that figure is low then there is probably little benefit from incorporating (although there might be). if that figure is high then professional advice is a must to ensure good tax planning.

Thanks (0)
avatar
By mikesloper
03rd Jul 2018 13:44

Thanks for your replies.

The only assets are stock.

What period would I use for valuation? The business is new, about 8 months.
1 - 4 months - average £2K profit
4- 8 month - average £6k profit
projected profit next 6 month £6-1ok

The work is basic fulfilment/postage and packing and a little customer service. Max a £2k monthly salary worth.

The hard work of developing the products and brands (2 brands - no trade mark) has already been done.

Rough estimate, how would you go about the valuation?

Thanks

Thanks (0)
Replying to mikesloper:
Portia profile image
By Portia Nina Levin
03rd Jul 2018 13:51

Your business isn't worth anything. £8K doesn't even cover a manager's salary.

Thanks (1)
Replying to Portia Nina Levin:
avatar
By mikesloper
03rd Jul 2018 14:07

£8k a month for a manager?

Thanks (0)
Replying to mikesloper:
paddle steamer
By DJKL
03rd Jul 2018 14:26

I think you are thinking of a £2k per month salary for someone doing the work re operations for the business you have started/created, what you more need to consider is them doing that, dealing with say all accounting, vat, compliance, new business development, keeping abreast of relevant legislation, modifying say website, marketing,everything the current owner does in effect, and what THAT would cost.

For £2k I might get someone to say run a shop where I have set up all systems etc, he/she follows existing setup, what you are actually needing to pay for is the person who does that AND creates all systems, adapts all systems over time, negotiates say with credit card machine operators, other suppliers, the bank re facility renewals,negotiates contracts, tenders for new business, everything; you do not get that for £24,000 p.a. Also remember £24,000 is not £24,000, you need to add on as a minimum employer NI and pension contributions, the business would also have payroll operating costs, employer's liability insurance, holiday cover etc etc etc.

Thanks (0)
By Tim Vane
03rd Jul 2018 14:24

At those levels of profits you need a professional adviser sooner rather than later as you are likely to be out of pocket quickly unless you get some planning done. You are not going to get sensible tailored advice from an internet forum. Sit down with some professionals and choose the one that your feel comfortable with; it will save you a lot more than it will cost.

Thanks (0)
Replying to Tim Vane:
Red Leader
By Red Leader
03rd Jul 2018 17:04

What he said.

Thanks (0)
avatar
By mikesloper
03rd Jul 2018 18:14

Thanks for the replies. I believe it's safe to say the business is not valued at zero.

My rough valuation (pending further research) would be

conservative annual projected profits (6k x 12 = 72k) - salary (32k) + assets (15k) = £55k

I would consider going to professionals but those that I have consulted were pretty shocking. I just mention valuation and they get confused. I asked one about using a DLA to "sell" the business and I got the impression he'd never considered it and he still wanted £1200 to do the job (no valuation) . It seems to me to get this done right by real professionals I'm going to have to pay a fortune for something that is seemingly "run of the mill". Or just do it myself :)

Thanks (0)
Replying to mikesloper:
avatar
By emmablyth
03rd Jul 2018 19:13

i am not a qualified accountant yet but i would suggest you search the internet for a local accountant who has a logo with CA, ACCA or ICAEW to be sure you get a chartered or certified accountant. Unfortunately there are too many unqualified accountants and the average person doesnt know that accountants are not a protected profession like a solicitor. A good chartered accountant, perhaps sole practioner shouldnt cost too much and they will help you get everything right.

Thanks (0)